Australia’s corporate watchdog has launched a fresh legal blitz against three companies it claims misled Australians before the collapse of investment funds First Guardian and Shield.
Thousands of Australians funnelled hundreds of millions of dollars in superannuation into the two managed investment schemes, with the savings now at risk of being wiped away after administrators took control of Shield in June 2024 and First Guardian collapsed earlier this year.
In new civil proceedings filed in the Federal Court on Thursday, the Australian Securities and Investments Commission claims financial services firms Interprac, SQM Research and MWL Financial Services all failed to adequately protect clients from inappropriate and high-risk investments into the funds.
In its claim against Interprac, ASIC alleges the firm failed to “take reasonable steps to ensure its authorised representatives complied with the best interests obligations contained (in the Corporations Act 2001) … in giving financial advice to retail clients to invest their superannuation in the Shield Master Fund and the First Guardian Master Fund”.
ASIC also alleges Interprac failed to put in place “adequate risk management systems”.
Interprac is a licensee that permits financial advisers to offer products to clients.
Its authorised representatives included Ferras Merhi and Rhys Reilly.
ASIC alleges Mr Mehri advised 2930 retail clients to invest $243m into First Guardian between January 2021 and August 2024 and 2664 retail clients to invest $173m in Shield between January 2022 and December 2023.
In return, ASIC alleges Mr Mehri’s businesses received payments from entities associated with First Guardian and Shield.
ASIC also claims Mr Reilly advised 1396 retail clients to invest $148m in First Guardian between April 2021 and May 2024 and 1139 retail clients to invest $114m in Shield between January 2022 and December 2023.
ASIC alleges Interprac failed to properly monitor and vet Mr Mehri’s and Mr Reilly’s activities, or respond to evidence that suggested their advice to clients was “not meeting standards”.
Camera IconASIC deputy chair Sarah Court is taking court action against Interprac, SQM Research and MWL Financial Services. NewsWire / Gaye Gerard Credit: News Corp Australia
Further, the watchdog claims the company failed to respond appropriately when Mr Mehri revealed a conflict of interest.
“On or about June 6, 2024, Mehri provided a statement to Interprac in which he admitted that companies he controlled had received more than $19m from entities associated with First Guardian and $500,000 from an entity associated with Shield,” court documents, seen by NewsWire, state.
“Despite this, Interprac permitted Venture Egg (Mr Mehri’s company) and Mehri to remain as its authorised representatives until May 31, 2025.”
ASIC is pursuing a separate court action against Mr Mehri.
Mr Mehri has told the ABC the allegations against him would be “strenuously defended” in court.
The watchdog also claims Interprac is guilty of multiple compliance failures, including preventing the use of a “negative consent” practice, which allegedly led to some clients’ superannuation being invested in Shield and or First Guardian without the express consent from those clients.
“We allege Interprac failed to ensure certain authorised representatives acted in their clients’ best interests, contributing to hundreds of millions of dollars of superannuation being invested in products that were unsuitable, high risk and costly,” ASIC deputy chair Sarah Court said on Thursday.
“We allege that no competent financial adviser could have recommended Australians invest large amounts of their superannuation in these funds and that Interprac – as licensee – should have been alert and responsive to the significant risk this conduct posed to clients, but it failed on many levels.”
Interprac is owned by ASX-listed Sequoia Financial Group.
ASIC is seeking declarations, civil penalties and orders to restrain Interprac from carrying on a financial services business.
The company has been contacted for comment.
ASIC also took aim at SQM Research, an investment research house that issues ratings on funds and other financial products.
Ratings can influence investment decisions.
In 2021 and 2022, SQM issued a “favourable” rating for Shield.
In its civil claim, ASIC alleges SQM failed to obtain the information it needed to properly assess Shield, failed to properly consider inconsistencies in information it received when preparing its reports about the fund, misrepresented that it had a reasonable basis for giving it a ‘favourable’ rating and had exercised reasonable care and skill in doing so and made misrepresentations that understated the percentage of funds managed by parties related to Shield and the asset allocation of the fund.
“We believe research houses are important gatekeepers and form part of a critical line of defence against poor quality investments or unsuitable products,” Ms Court said.
“Given the important role research houses play in rating funds and investments, the community is entitled to expect that their reports will be accurate and based on appropriate information and analysis.”
ASIC is seeking declarations and civil penalties from the Court.
An SQM spokesman told NewsWire the research firm was assessing ASIC’s claim.
“We’re assessing the claim made by ASIC and we’ll let our position be known on that in due course once we have properly assessed,” the spokesman said.
Finally, ASIC flagged it would pursue civil action against MWL Financial Services, former director Nicholas Maikousis and Imperial Capital Group Australia.
Camera IconASIC is pursuing court action against Ferras Merhi related to alleged kickbacks he received to advise clients to invest money into First Guardian and Shield. NewsWire / David Geraghty Credit: News Corp Australia
The watchdog claims that between May 2022 and February 2024, nine MWL representatives advised at least 556 clients to invest about $114m in superannuation into Shield.
“MWL failed to take reasonable steps to ensure its representatives acted in the best interests of its clients and provided appropriate advice in respect of recommendations that clients roll over their superannuation to invest into Shield as the preselected investment option,” ASIC stated in a media release on Thursday.
“MWL failed to ensure its financial services were provided efficiently, honestly and fairly and failed to have in place adequate arrangements to manage conflicts of interest.
“Imperial, acting as a lead generator, made misleading representations to prospective clients about the standard, quality and benefits of MWL’s financial services and was involved in MWL’s alleged contravention of its obligation to provide financial services efficiently, honestly and fairly.”
ASIC claims MWL received “advice fees” charged to clients for preparing Statements of Advice recommending investment in Shield and Imperial received through a related entity about $12.8m from entities associated with Shield for client referrals and the promotion of Shield.
“ASIC will seek to allege that MWL and Imperial were involved in a project that resulted in the superannuation of hundreds of Australians being invested into a high-risk scheme,” Ms Court said.
“Despite Shield having no proven track record, we will seek to allege clients were advised to invest most or almost all of their retirement savings into the fund, irrespective of their individual circumstances.”
MWL is currently in administration.
“ASIC’s application to make these allegations is subject to the Court’s approval (or the consent of the Administrators),” the watchdog stated.
“If allowed to proceed, ASIC will seek declarations and civil penalties against all defendants, and orders disqualifying Mr Maikousis from managing corporations.
